The Mid-Eastern Discatenation

Conflicts Forum's Weekly Comment, 5-12 December 2014

Returning from strategic discussions in the region, it is not easy to reflect on how one might define the region now. But if there is an overall impression, it is one of a disjoining of the old patterns of category by which the Middle East has been habitually thought. It is striking how many of these categories themselves now seem somehow passé. For example, the Israeli Palestinian ‘peace process’ (in fact, ‘peace process’, as a genre, feels curiously exhausted); the Iranian nuclear negotiations (now in danger of becoming some unending ‘process for process sake’, as Israel and the Gulf States plead for more ‘process’, but warn sternly against any solution); Geneva II and a political transition in Syria; the Arab liberal ‘Spring’; and more generally, the instrumentalised sectarian narratives. All seem passé.

Much of this 'old' politics, apart from suffering from a certain tiredness, seems curiously inept in the light of unfolding events.

So, what seem to be emerging as the new categories? Firstly, the geo-political struggle (dating back to Yeltsin’s era) by the US to contain any Russian challenge to its primacy (to put Putin ‘back in his box’, as it were), and to quell any incipient slide by Europe towards Moscow. Already this 'war' has brought China into its embrace. China well understands that that which befalls Russia now may well be their lot, too - in due course. This recognition has allowed geo-strategic concerns (the importance of Russia not being the first domino to fall, and of secure Middle East oil supplies) to trump short-term Chinese commercial considerations - such as uncritically wallowing in the ‘blessing’ (for the Chinese) of low crude prices. China cannot simply ignore the geo-strategic consequences of the US succeeding in knocking Putin and Russia back into their 'box' – since Russia's fortunes are somehow a litmus for China’s own strategic future.

This Russo-Chinese link -- from the patterning of future energy flows, to the 'new Silk Road' economics, to joint defense links -- offers the Middle East real substance to its growing ‘look-East’ orientation.

But what is even more immediate for the region (than for example that Syria could become a flash-point, a new ‘Cuban missile crisis’ in this conflict were the US to target the Syrian state, and Damascus respond with advanced SAMs) is the nature of this war, as it impacts the Middle East.

The region, in short, finds itself in the midst of a geo-financial war, rather than the familiar geo-political struggle of the past. And geo-financial ‘war’ is much less predictable than 'old' geo-political war. With so many bubbles inflated across the globe from the tsunami of Central Banks' debt monetisation – any one of these may 'pop' anytime, and without warning. More significantly, the winners and losers in such crises do not necessarily co-locate under old-style political alliances (for example Kuwait, a Saudi ally, emerges as one of the prime losers of low crude prices in company with Iran, Saudi Arabia's eternal enemy).

However it came about (whether one understands it geo-politically, or as simply market determined), the cratering of the price of crude is of major significance. Plainly it affects regional energy producers by lowering revenues and budgets (and possibly igniting popular disaffection in those regional states – without huge cash reserves – who have relied on state handouts to anaesthetise domestic frustrations). But the drop in the oil price has much wider implications too.

The shale-oil producers of the US may have hedged (insured the price of) their oil output for most of next year, but the financial counter-parties to the shale companies’ price-hedging will be nursing some heavy losses. In latter years, American companies have been pouring investment into the energy sector (some $550 billion since 2010 according to Deutsche Bank). Much of this (often levered) investment was financed at near zero interest rates (on the expectation that it would return high profits) - and through the issuing of (sub-prime) junk bonds. A maintained slide in crude oil prices to $60 (WTI – the benchmark pricing for American crude), Deutsche Bank assessed, might lead to one third of bonds having to be re-structured. As one analyst notes: this “would imply a 15% default rate for overall US [High Yield] bonds ... A shock of that magnitude could be sufficient to trigger a broader High Yield market default cycle, if materialized" leading to pain across credit markets more generally. In short, it could bring about a much broader financial crisis. (At the time of writing WTI has broken $60 and stands at $58). In other words, this may turn out to be something akin to the sub-prime mortgage fiasco that caused the financial crisis of 2008.

This is just one aspect of the financialisation of the resurgent Cold War. We have an oil war; we have currency wars (competitive re-valuations and de-valuations), which are the sequelae to oil price wars; there is a sanctions war against Russia; there is the non-dollar trading counter-move by Russia and China (which is now more sceptical of the value of its own dollar peg); there is another ‘counter’ in an analogue SWIFT clearing system, which Russia will trial this month -- and there is the unexpected demise of the petrodollar (see here). And for the first time, energy producers are forecast to be extracting capital and liquidity from the American financial nexus, rather than re-cycling it back into New York.

Any one of these changes alone is potentially of major import for Middle Eastern dynamics: for example, the prospect for non-dollar trading and interbank clearing of financial claims alone have major significance for Iran and Syria. But there is more: there is gas ‘war’. And this ultimately may prove to be more important than the oil war. Again, this move will slice the region in a different way: In the face of EU “obstruction”, President Putin has announced the cancellation of the South Stream pipeline that would have carried Russian gas into south east Europe. A new pipeline instead will run the same volume of gas as South Stream, in to a ‘hub’ in Turkey; and the trans-Ukrainian gas pipeline to Central Europe will cease serving Europe with gas. For the future, the Ukrainian pipeline will only provide gas for Ukraine’s domestic needs.

Those European states that would have benefitted financially – particularly in terms of the employment generated by the project - are not happy, and Brussels has no obvious alternative source of gas (the new Turkish hub is likely to displace Israel’s already shaky project). But if the EU wants gas supplies (and Europe is 90% dependent on import of gas), it will have to finance and build its own pipeline to Turkey. By this action, President Putin has indicated very clearly that he can sell ‘Europe’s gas’ to China and to Asia (i.e. underlining yet again, that EU sanctions hurt Europe as much as they do Russia). Iran (and perhaps later Syria) will likely feed into this pipeline, and into Russia’s central Asian pipeline network. And so, as the OPEC oil cartel crumbles, so a prospective gas ‘cartel’ is taking shape.

Putin’s move is shrewd politically too. As Turkey is rebuffed by the EU, Putin has offered Ankara the chance – long sought – to become a key energy corridor and hub. (Turkey will also become the proposed hub of China’s Silk Road economic project). And instead of NATO, a bruised Turkey is being ushered into the SCO. In a sense, Putin has offered Turkey his own ‘Association Agreement’ -- and Turkey has snapped it up (the path opening to Asia). (A door too, may still be open for the EU to re-consider its position on South Stream, but essentially we have here the beginnings of a new Eurasian energy and trade configuration to which Europe, at best, will be an observer).

So the financialisation of ‘war’ with Russia is slicing up the Middle East in new ways (and not particularly in ways favourable to Europe, or the US). This new generation 'Treasury' warfare has in itself become a potent 'driver', rather than politics serving as the usual driver of geo-strategy. But adding to the uncertainty, to the imprecision of who may emerge as winners or losers, and to the awareness of impending risk, is the sense that western attempts to solve a debt crisis with more debt, is coming to a head. The Bank for International Settlements (BIS), the British PM, and many others, are warning that a financial crisis is looming. How it may break is unclear.

So, what of politics in the region? The Gulf States, in a notable shift, have taken Egypt as their primordial interest and source of concern -- pushing Libya, Yemen, and even Syria, down the agenda. These states are determined to support President/Field Marshal Sisi, at almost any cost – and to coerce Qatar into acquiescence on this issue. The P5+1 talks deadline has passed without a solution, and yet the sky has not fallen in. In fact very little has changed for Iran (though the domestic mood has shifted against President Rowhani). Indeed – rather than a worsening of relations with the US (as happened in the wake of 2004 negotiations) – we may yet see some areas of discrete Iranian co-operation with America opening up. And in Syria, the government continues to expand its control.

Even the issue of ISIS seems to be in something of stasis. Everybody is seeking to use ISIS for their own interest. And while ISIS has, for the time being, been pushed on the defensive (mainly by Iraqi militias, the Iraqi army and Iranians working in ad hoc combination), America can claim credit for the improved situation (without making further effort), and, at the same time, no one quite wants ISIS truly defeated. The ‘phony war’ somehow has arrived at something of a ‘balance’; for how long – time will tell.

But to leave matters there, would be to miss something. The recent, very plainly-spoken, and candid address by President Putin to the Federal Russian Assembly was somehow an acknowledgement that Russia is at a sort of war with the US. (The US Congress, not surprisingly, has in parallel issued its own 'declaration of war on Russia'). Although we have highlighted the financialisation of the conduct of this 'war', it would be a mistake to focus on only these aspects.

This 'war' can become real war. Mikhail Gorbachev has warned of potentially dire consequences if tensions are not reduced: "This is extremely dangerous, with tensions as high as they are now. We may not live through these days: someone could lose their nerve".

There is also another potent dimension to this conflict, and it is one that cuts directly across western societies. President Putin’s insistence on state sovereignty and legality as the basis of the global order, plus his articulation of American and European mis-use of the international order, resonates with many in the Middle East (and in Europe too). His defence of traditional European values, and his emphasis on recouping human, spiritual and family values as the basis of society and politics in the face of what he sees as an European descent into decadence, has – we should be clear - a broad constituency spanning the Middle East and Europe. His arguments for building strong states (and leaderships) less vulnerable to external undermining, naturally has wide appeal in the Middle East.

In effect, Putin’s address is setting up the basis for a confrontation between Christian traditional European conservatism and post-Christian western social liberalism cum market neo-liberalism. Interestingly, Putin’s stance, with its emphasis on the recovery of sovereignty and autonomy, in its moral outlook, and its traditional economics (a return to gold-based standards), is finding strong resonance amongst Europe’s rising parties of the Right from the UK to France, to Germany – et alii.

The anti-EU impetus within Europe is increasingly defining itself in terms of just such such stands, and in seeking better relations with Russia -- and concomitantly, a distancing from the US. This is happening just when Europe’s 'élite' has been coerced back into the converse posture and when such European 'Atlanticism' is far from being in general favour. A study by the Hungarian policy research institute Political Capital, for example, showed that 15 of the European Parliament's 24 Rightist parties now are receptive to Russia.

The ideological struggle playing out, in Iran, Russia, and China, between a vulnerable Atlanticist current, and a surging re-sovereignty-isation and re-culturisation current (excuse the awkward formulation of words) may thus become a more prominent feature in European domestic politics too. It is all too easy to lose the significance of this in the torrent of the on-going western demonization aimed at President Putin.